Thursday, June 28, 2007

More evidence that housing issues will get worse before getting better

Dean Baker, co-director of the Center for Economic and Policy Research, argues that they not only will, they need to. First, the will:

The downward price pressure is bound to pick up steam as the wave of foreclosures gains momentum. Foreclose rates have been rising rapidly, albeit from very low levels. While the highest rates can still be found in depressed areas of the Midwest, such as Ohio and Michigan, the most rapid growth is taking place in formerly hot markets like Florida and San Diego. Nominal prices are already down by 6 percent year over year in San Diego, which translates into a real decline of close to 9 percent. As auctions of foreclosed homes proliferate, competing sellers will have to adjust their prices downward.

Baker goes on to note that sales in the last two months, for the most part, do NOT include the recent half-point uptick in mortgage rates. In other words, there’s plenty more softness, or even melting, to come; Baker expects Chinese reinvestment shifts to probably be worth another quarter-point uptick, to boot.

Next, the need to come down part of his post, based on how Wall Street and the Fed pooh-poohed the similar situation in the dot-com world at the start of the decade. A prediction of how the inflationary fallout will play out is included:
While the bulk of economic forecasters still insist that the impact of the housing collapse on the economy would be minimal, they also insisted right into 2001 that the economy was doing just fine and that the stock bubble would continue to expand. When a recession looms on the horizon, their predictions are not worth very much. …

Bubbles always collapse, and the sooner this one deflates, the less harm it will ultimately cause the economy and homeowners.

The real problem was the failure of the Fed to take the housing bubble seriously. It decided that its mandate to pursue “price stability” has nothing to do with asset prices. Alan Greenspan and his successor Ben Bernanke stood by smiling as house prices nationwide rose an average of 70 percent above trend levels.

When the market corrects and the full extent of the damage becomes apparent, redefining the Fed’s responsibilities should be a top priority. The damage from the creation and disappearance of $7 trillion dollars in housing bubble wealth swamps any possible damage that might result from a rise in the core inflation rate from 2 percent to 3 percent.

Heck, the housing bubble is just illustration No. 927 of the need to redefine Fed responsibilities — and make that stick.

Baker’s right that this collapse is nothing to celebrate. And, if he’s right about the 2-3 percent core inflation uptick, this is going to be a big, recession-related political issue next year.

Cross posted at SocraticGadfly.